Subgovernment Consumption-Based Tax Deductions: Is it Time for Congress to Overhaul These Provisions?

• In Event: Public Interest 4

Abstract

Several provisions of the U.S. Tax Code consistently emerge as controversial when Congress and the White House craft proposals for reforming the Code and balancing the federal budget deficit. In the last overhaul of the Tax Code in 1986, three specific (3) provisions were “on the table” for possible repeal including deductions for state and local income taxes (IRC §164(a)(3)), state and local sales taxes (IRC §164(b)(5)), and real property taxes (IRC §164(a)(1)). These three aforementioned itemized deductions are considered federal tax expenditures and are based on consumption at the state and local levels. Further, many taxpayers who claim these deductions are subject to the provisions of the alternative minimum tax (IRC §55) and the itemized deduction limitation (IRC §68). The purpose of this paper is to examine how each tax deduction is claimed, discuss how these taxes contribute toward financing state and local government activity (referred to as sub-government activity), and examine how these tax deductions fared in some of the tax reform proposals since the Tax Reform Act of 1986.

Authors

• Benjamin R Silliman, St John's University

• Biagio Pilato, St John's University